To the Victors, the Contracts

Which engineering firms will rebuild Iraq, and how will contracts be let?

2 July 2003—Nobody needs to be told that the reconstruction of Iraq is a highly charged subject, with huge human, political, and financial interests at stake. Obviously, the immediate welfare of all persons living in Iraq depends almost entirely on how well the job is done, and in the longer run, so will prospects for self-government and healthy relations between Iraq and the victor countries. At the same time, the way the job is done will have an impact on relations between the victors and the many more countries that proved unwilling to join the ”coalition of the willing.” And those relations, in turn, will have important effects on the availability of funds to support reconstruction work and on the work itself.

The decision by the Bush administration to rely heavily on private contractors, and to put reconstruction work in the hands of companies with which members of the administration have had close ties without open bidding, was controversial from the start. Bechtel National Inc. (San Francisco), the world’s largest engineering contractor, was awarded US $680 million early this year to rebuild Iraq’s electrical grid, water-treatment systems, roads, and schools. It is expected to remain, in effect, the United States prime contractor and perform work that runs into billions of dollars, at least.

Separately, Kellogg, Brown, and Root, a Houston, Texas subsidiary of Halliburton Co. (Dallas), was awarded an ”indefinite delivery/indefinite quantity” contract with a $7 billion cap to extinguish Iraqi oil well fires and then help get the Iraqi oil industry back on firm footing. Halliburton was once run by U.S. Vice President Dick Cheney, while Bechtel’s leadership has boasted former Republican cabinet members like George Schultz and Caspar Weinberger, secretaries of state and defense, respectively, under Ronald Reagan.

Perhaps because of the ongoing criticism over the no-bid contracts and a looming Congressional inquiry, the U.S. Army Corps of engineers announced on 27 June that it is ending the Halliburton contract. The agency plans to solicit bids for two contracts to repair Iraq’s oil fields.

The scope of the contracts—one for northern Iraq and one for the south—has yet to be defined. As a result KBR, which just complete $235 million-worth of work, will, at best, get half of the oil field work. The Corps of Engineers plans to award the contracts, whose value could reach $500 million each, to two separate firms.

The United States Agency for International Aid (USAID, Washington, D.C.) retains overall authority for reconstruction work, and no projects subcontracted by Bechtel can proceed without an approved job order from it. Bechtel has said it expects to farm out 90 percent of the reconstruction work, while itself handling the repair of 50 bridges and more than 1000 schools, medical facilities, and water-treatment plants. Though Bechtel says 3000 subcontractors from across the globe showed up at information sessions it held in Washington, D.C., London, and Kuwait City, Kuwait, only 16 contracts had been awarded by mid-June. Of the 7800 firms that had requested work in Iraq by then, more than 2800 were U.S.-based.

The contracts let to date mainly have been to make Iraq’s airports and its only deep-water seaport serviceable so that the million tons of food expected to arrive in the country by September at the behest of the United Nations, not to mention materials for the rebuilding effort, can be handled with as few complications as possible. Of these contracts, only one was awarded to an Iraqi firm. The al-Bunnia Trading Company (Baghdad) won a $5 million contract to rebuild a 1.6-km-long bridge destroyed during the war. The rest of the contracts have gone to U.S., British, Saudi, and Kuwaiti companies.

Meanwhile, the United States has come under mounting pressure from other countries to be balanced in awarding the contracts. A 25 June Washington Post story noted that potential donors to the reconstruction effort are privately demanding that the United States make clear its plans for Iraq’s oil revenue and guarantee more opportunities for foreign companies. Countries like Germany and France, which opposed the war, have intimated that contributions toward the cost of reconstruction would be slow in coming if they are shut out of the process.

One top priority: electricity

With summer temperatures at a scorching peak, and Iraq’s major cities desperately short of electricity for air conditioning and water pumping, as well as for cooking and lighting, the task of repairing and bolstering Iraq’s power grid has to be counted among the most urgent. In recent days and weeks, most residents of Baghdad have been without electricity most of the time, while temperatures (in Celsius) have been well into the thirties—above 100 degrees Fahrenheit—much of the time.

Generally, Bechtel has been tight-lipped about many of the specifics of the reconstruction plan. But on 27 June, Mike Robinson, Bechtel’s program manger for power, told IEEE Spectrum that the Iraqi Electricity Commission is attempting to add 4000 MW of generating capacity to the grid by the end of July. The plan, he said, is to continue increasing output until there is at least 5 percent reserve capacity nationwide.

Robinson noted that, in his estimation, Baghdad needs about 1700 MW to meet current peak demand, but at the moment has an active capacity of only 1200 or 1300 MW, at best. As the summer heat gets worse, the Bechtel engineer said, ”They can expect that each additional degree [will add] an extra 70 MW of additional use.”

For years, Baghdad consumed far more power than it generated, relying on power imported from other regions of the country. While Baghdad usually received 20 hours of electricity a day, areas the government considered less important got four or five hours of power. Now, as Baghdad struggles to keep the lights on, the destruction of the transmission towers that once allowed it to consume 60 percent of the nation’s generating capacity has left the capital city without a lifeline.

On 26 May, Engineering News-Record (a construction industry weekly published by McGraw-Hill in New York City) reported that some generating facilities in southern Iraq had been put back online. But, Yarub Jasmin Ahmed, managing director of the state-owned Southern Electric Co., told the publication that damage to transmission lines between Basra and Baghdad means that electricity generated in the south had to remain there. Southern Electric operates power plants producing a total of 1732 MW. However, with 40 of the company’s 400-kilovolt transmission towers and 25 of its 132-kV towers having sustained damage during the war with the United States and Britain—and, more recently, from attacks by looters and saboteurs—it is in no position to provide power to the capital city.

Fighting for power, in both senses of the term

Bolstering the grid enough so that the average Iraqi can take a reliable supply of electricity for granted would be a challenging and expensive proposition even in stable times. But the lack of law and order has made ”standing up” the nation’s infrastructure almost impossible.

On 20 June, the Washington Post reported that ”in April, when [engineers from Bechtel] first set out to assess the damage to Iraq’s transmission towers on the southeastern leg of a line from [Al] Qurnah to Al Kut, [they] found 13 towers knocked down by looters in search of copper, aluminum and steel. A month later, [they] discovered 52 more towers had been destroyed.”

On 21 June, The New York Times reported that dozens more had been toppled, and that in Al Falluja, a town 50 km west of Baghdad, a transformer was destroyed by a rocket-propelled grenade, leaving nearly half of its 75 000 residents without electricity. Bechtel’s Robinson considers such vandalism ”a combination of organized resistance and opportunism.”

The 20 June Washington Post report discussed leaked internal memos from companies working in Iraq that point to organized looting and smuggling operations targeting the grid. According to one report cited in the story, more than 500 tons of copper, aluminum, and steel stolen from transmission towers is smuggled across the Iranian border daily. Where is this metal coming from? The Engineering News-Record reported on 26 May that 50 km north of Basra, looters used an acetylene blowtorch to cut down a tower supporting a132-kilovolt transmission line. Vandals, say Iraqi engineers, rely on smelting plants to turn the stolen copper wires and steel support structures into brick-like bars for transport to Iran.

How high will the total cost run?

Bechtel’s Robinson would not say how much repairing the grid is likely to cost in all, but a 16 April report commissioned by the Council on Foreign Relations (New York City) said restoring it to the state it was in before the first Gulf War would cost $20 billion. And by all accounts, that will be not nearly good enough.

Though opinions still differ with regard to the exact state of the Iraqi grid before the latest conflict there, all concerned agree that even before Gulf War II, Iraq’s national power infrastructure was inadequate. A New York Times report said the country’s power plants generated 5500 MW, even at full capacity. And now—with the nation’s industrial facilities mostly shuttered because securing raw materials is difficult and people with money to purchase anything but the barest essentials are few and far between—peak demand is 6800 MW.

USAID says its mission is to simply restore Iraq’s grid to pre-war conditions. At a 21 April press conference, USAID’s administrator, Andrew S. Natsios, said the agency will wrap up its operations there within two years [a transcript of the conference is available at http://www.usaid.gov/iraq/].

But at a conference sponsored by the United States Energy Association (Washington, DC.) and by the publications Energy Daily and Defense Week (both in Washington, D.C.), independent experts said the coalition’s goal should be more ambitious. One expert at the conference, Steve Gehl, director of strategic technology at the Electric Power Research Institute (Palo Alto, Calif.), said that per capita electricity usage in Iraq is about 1100 kilowatt-hours a year—about the same rate as China, a developing nation. South Korea’s, by comparison, is 3000 kWh per person per year, Gehl pointed out.

Tough questions

As estimated costs of rebuilding Iraq climbing all the time, and as estimated time it will take gets longer, perhaps the biggest question of all is where the money will come from: in particular, who will control the country’s oil and how the revenues will be spent.

Basically, as things stand, the United States and Great Britain have almost undisputed control over Iraq’s oil. Section 20 of U.N. Security Council Resolution 1483 (22 May 2003), which removed the sanctions imposed on Iraq after the 1991 conflict, says that ”all export sales of petroleum, petroleum products, and natural gas from Iraq shall be deposited into the Development Fund for Iraq” until an internationally recognized Iraqi government is established. Of the fund, Section 13 of the Resolution says, ”the funds in the Development Fund for Iraq shall be disbursed at the direction of the Authority,” which consists of U.S. and British governmental representatives.

Thamir Ghadhban, the interim head of the Iraqi Oil Ministry, has been quoted as steadfastly insisting that Iraqis control the country’s oil revenues. But observers the world over mostly take the view expressed in a 26 May New York Times article by Walid Khadduri, editor of the Nicosia, Cyprus—based Middle East Economic Survey. Said Khadduri: ”The Security Council resolution is quite clear: Iraq is under occupation, and there is no government, no ministries. The Iraqi technocrats will manage on a day-to-day basis, but the policy will be American, because there is no sovereign Iraq.”

As for the U.S.-led coalition’s policies with regard to the oil revenues, there has been much talk of Iraq’s oil industry paying for the reconstruction. But a great deal of investment will be required before the nation’s wells reach the levels of production necessary to cover the country’s massive debts. The Council on Foreign Relations notes that, up to the moment Gulf War II broke out, a fourth of all revenue from Iraqi oil sales was being diverted to a fund from which Kuwait and the owners of businesses that suffered losses in the first Gulf War received reparations. Iraq currently owes commercial banks and foreign governments about $100 million—a quarter of its total outstanding financial obligations. But Resolution 1483 has made revenue from Iraqi oil sales off limits to all creditors through the end of 2007.

Freeing up the oil revenue for use in reconstruction is a start, but according to the aforementioned Council on Foreign Relations report, Iraq’s oil industry would have to go well beyond its pre-war production level of 2.5 million barrels per day to generate any money for reconstruction. Getting to that point—still considered a mere trickle compared with the nation’s 100 billion barrels in proven reserves—from the current 700 000-barrel-per-day output is easier said than done.

The council report, called ”Iraq: The Day After,” says restoring production to its 1977 peak of 3.5 million barrels per day would require an investment as high as $7 billion over the next two years. ”To achieve more significant increases—say, to 6 million barrels per day by 2010,” the report states, ”Iraq would need multiyear investments totaling over $20 billion.”

In a nutshell, Iraq’s oil situation reflects the old adage that in order to make money, you need money.

Adding it all up

At a 4 June hearing of the U.S. Senate’s Committee on Foreign Relations, Dov S. Zakheim, undersecretary of defense, testified that President George W. Bush has already authorized the transfer to the region of some of the $1.7 billion in frozen Iraqi assets under U.S. control. Zakheim mentioned several other sources of initial funding for Iraqi reconstruction: $800 million seized by coalition soldiers during the war; $2 billion pledged by the international community since the war’s end; $1 billion still in the coffers of the Development Fund for Iraq, established with funds kept in escrow from the United Nations’ Oil-for-Food program; the $2.475 billion allocated by the U.S. Congress in the Emergency War Time Supplemental Procreations Act of 2003; and $489 million appropriated specifically for use in repairing damage to Iraq’s petroleum infrastructure.

This may seem like a huge sum. But if estimates are correct, the $8 billion already on the table will not last long. Meanwhile, according to the Council on Foreign Relations and not contradicted by the U.S. Department of Defense, it is costing upward of $2 billion a month merely to support the approximately 150 000 U.S. troops in Iraq. They provide security for people doing reconstruction work but do not, by and large, do the work themselves.

Getting that work done, and finding money to pay for it, will require the cooperation of many countries and contractors, including Iraqis. Yet, so far, many U.S. principles and procedures have struck potential partners as irritating or just plain baffling.

”Bechtel has introduced operating standards that, while common in the West, are new to Iraq.” the San Jose Mercury-News reported on 30 June. ”For example, it wants contractors to provide employees with hard hats, goggles and boots, as well as a safety plan.”

The report quoted Iraqi businessman Kamil al Gailani, one of 500 would-be subcontractors attending a Bechtel supplier conference at Baghdad’s convention center. ”Everything is new for us. Insurance, safety—we don’t have such standards in Iraq. But this is the New World Order, whether we like it or not.” Bechtel has given no indication as to how it will parcel out jobs except for saying that it plans to acquire 75 percent of the equipment for its portion of the work from Iraqi suppliers and draw 90 percent of its workforce from Iraq.

Who will fill the void?

Typical of the frustrations facing some Iraqi entrepreneurs is the story of Rubar Sandi, which was featured both in the 18 June Washington Times and the 9 June Los Angeles Times. Sandi is an Iraqi-American investment banker who, like dozens of businessmen with similar backgrounds, began trying to make money in post-war Iraq as soon as the last battles ended.

Sandi, who had founded the U.S.-Iraq Business Council (Washington, D.C.) and taken part in the Future of Iraq rebuilding project sponsored by the U.S. Department of State, attempted to set up a cellular telephone network and start a commercial airline. The already substandard wireline telephone networks were severely compromised by looters looking to grab whatever they could get their hands on. Wireless service in a nation where before the war only three in 1000 people had access to a telephone would be a highly prized quick fix. And because ground travel had become too hazardous even for military personnel except in convoys protected by heavy artillery, regional air service, Sandi thought, would come in handy.

Sandi was ready to roll out both services. He had a telecom company prepared to install cellular base stations and relay stations. He also had lease agreements on several jets and labor agreements with former Iraqi Airways Co. (Baghdad) pilots, crews, and ground personnel. But the Office of Reconstruction and Humanitarian Affairs (now renamed the Coalition Provisional Authority) quickly dashed his hopes. The authority warned him that it would confiscate any telecommunications equipment he tried to install and would ground his planes. Their reason: telecommunications and travel were critical industries that required more consideration before approvals could be granted.

But by the end of May, the U.S. Department of Defense had awarded a contract to build a mobile phone network in Baghdad to disgraced telecommunications firm WorldCom, renamed MCI (Ashburn, Va.).

Though disappointed, Sandi, who characterized the authority as ”nothing but a bunch of bureaucracy,” quickly found another niche. He and a partner are now providing a package of services, including security, transportation, catering, and translation, for foreign executives. They have leased four Baghdad hotels with plans to turn them into full-service business centers. The centers will be ready for the executives they predict will be making their way to the Iraqi capital as lucrative business opportunities like the ones Sandi once anticipated in aviation and cellular telephony arise again—or seem to.